Whether you are an employee, a proprietary director or self-employed individual it’s that time of year when you need to consider whether to make an additional pension contribution. Tax relief can be claimed on pension contributions made in respect of employment or self-employed income that you earned in 2017 up until 31 October 2018 (or until 14 November 2018 if you pay your tax and file your tax return using ROS, the Revenue online system).
How much tax relief will I get?
If you pay tax at the higher rate (i.e. for a single person if your income exceeds €33,800 or €42,800 for a married single income couple) then the pension contribution can attract tax relief at 40%, the higher rate of income tax. There is no relief from PRSI or the Universal Social Charge however.
How much can I contribute?
| Age | Contribution Limits for Tax Relief as a % of Net Relevant Earnings |
| Under 30 | 15% |
| 30-39 | 20% |
| 40-49 | 25% |
| 50-54 | 30% |
| 55-59 | 35% |
| 60 and over | 40% |
There is a maximum annual amount of earnings in respect of which contributions can be made and this is currently €115,000.
What is the impact of a pension contribution on my Preliminary Income Tax payment?
If you have income other than income that is taxed under the PAYE system or if you are a director of a company then you are a chargeable person and you are required to file an income tax return for 2017. A chargeable person is also required to pay preliminary tax on account of the current tax year, 2018, by 31 October 2018 (or 14 November 2018 if tax is paid and the return is filed online.
Preliminary income tax is computed as either 100% of the prior year liability (i.e. 2017 liability in the case of 2018 preliminary tax) or 90% of the estimated liability for 2018.
If you make a pension contribution on account of 2017 then you will reduce your 2017 tax liability. If you base your preliminary tax for 2018 on your 2017 liability then the amount of preliminary tax payable will also be reduced. This gives rise to a cash flow advantage as the balance of the 2018 tax won’t be payable until 31 October 2019.
Traps to Avoid
There is a limit on the amount of pension that an individual can have on retirement. This is referred to as the standard fund threshold and is currently €2m. If your pension benefits will exceed €2m then it is not recommended that you make any additional pension contributions as the value of your fund in excess of €2m on retirement will be subject to tax at 40%.
You need to ensure that the return on your pension investment makes economic sense. There is little point investing in a pension if the fund doesn’t perform. You need to select your pension investments carefully and ensure that they are appropriate to your circumstances.
How We Can Help
Careful thought needs to be given to whether you should make additional pension contributions. These include tax, retirement planning and financial considerations. Now is the time to consider.
